Nil-Rate Band Trust UK (2026): Discretionary NRB Trusts in Wills — History, Uses, and Pitfalls

A nil-rate band discretionary trust (NRB trust or NRB discretionary trust) is a trust created by a will that directs the deceased's nil-rate band — currently £325,000 — into a discretionary trust on first death, rather than passing all assets outright to the surviving spouse: (1) THE MECHANISM: the will provides that on the first spouse's death, assets up to the NRB (£325,000) are transferred into a discretionary trust. The trustees — typically the surviving spouse and children — hold the trust fund for a class of beneficiaries (usually children, grandchildren, and the surviving spouse). The surviving spouse can often benefit from the trust income or capital, but the trust assets are legally separate from the survivor's own estate; (2) THE PRE-2008 PURPOSE: before Finance Act 2008, the NRB could not be transferred between spouses. If the first spouse left everything to the survivor under the spouse exemption (IHTA s.18), the first spouse's NRB was WASTED — on the survivor's death, only the survivor's NRB was available. An NRB trust solved this: (a) first death: £325,000 goes into trust (using the NRB — no IHT); assets above £325,000 pass to survivor under spouse exemption; (b) survivor's death: trust fund (now grown) is outside the survivor's estate — owned by the trust, not the survivor; only the survivor's own NRB is used on their estate. The trust fund escapes IHT entirely at the second death; (3) THE SIZE OF THE SAVING (PRE-2008): a couple with a combined estate of £700,000 — without an NRB trust — would pay IHT of £150,000 on the survivor's death (£700,000 − £325,000 NRB × 40%). With an NRB trust, the trust fund of £325,000+ is outside the second estate entirely — saving £130,000 in IHT. For larger estates the savings were proportionately greater; (4) WIDESPREAD ADOPTION: NRB trusts became standard in professionally drafted wills from the late 1980s through to 2008. Many millions of existing wills include NRB trust provisions — and many of these trusts have been activated (the first spouse has died and the NRB trust is operational). Practitioners estimate hundreds of thousands of active NRB trusts exist in England and Wales.

Finance Act 2008 introduced the transferable nil-rate band (TNRB) under IHTA 1984 s.8A, fundamentally changing the IHT landscape for married couples: (1) THE TNRB MECHANISM (IHTA s.8A): on the death of a surviving spouse or civil partner, any unused portion of the nil-rate band from the first spouse's estate can be transferred and added to the survivor's NRB. If the first spouse left everything to the survivor (using the full spouse exemption — and therefore using NONE of their NRB), 100% of the first spouse's NRB is transferred. The surviving spouse's estate effectively has a double NRB of £650,000; (2) THE NRB TRUST'S IHT ADVANTAGE DISAPPEARS FOR MOST COUPLES: with TNRB, a couple who leaves everything to each other gets the same net result — £650,000 combined NRB — as a couple using an NRB trust. There is no longer a pure IHT advantage to an NRB trust for a standard married couple where: (a) both spouses have UK-domicile; (b) the first estate was left entirely to the survivor (unused NRB = 100%); (c) neither has been married before; (3) RETROSPECTIVE APPLICATION: TNRB applies retrospectively — it is available where the first spouse died BEFORE 2008 (even decades earlier), as long as the survivor is still alive. This means many older wills with NRB trusts were rendered redundant. However, executors of the first estate may need to provide evidence of the first estate's NRB usage to claim the TNRB; (4) STILL USEFUL FOR PARTIAL FIRST ESTATE USAGE: if the first spouse's estate partially used the NRB (e.g. they left £100,000 to children outright, using £100,000 of the NRB), only 69% of the NRB was unused (£225,000 of £325,000). TNRB then transfers 69% — the survivor gets 169% of the NRB. An NRB trust set precisely at the remaining £225,000 would achieve the same effect but is more complex; (5) IMPORTANT NOTE — MULTIPLE MARRIAGES: a surviving spouse who has been widowed more than once can only claim ONE additional NRB (100% maximum) — the NRB cannot be quadrupled by multiple marriages. IHTA s.8A(2) limits the claim to 100%.

Although the pure IHT purpose is largely displaced by TNRB, NRB trusts remain relevant for specific situations: (1) SECOND MARRIAGES — PROTECTING CHILDREN FROM FIRST FAMILY: where a testator remarries and has children from both a first and second marriage, an NRB trust can ring-fence assets for the children of the first family. Without it, all assets pass to the second spouse → on the second spouse's death, everything might pass to the second spouse's children, cutting out the first family. An NRB trust puts £325,000 outside the second spouse's control, with the children as discretionary beneficiaries. This is the single most common legitimate reason to use an NRB trust today; (2) PROTECTING ASSETS FROM CARE HOME FEES: assets in a discretionary NRB trust may — in some circumstances — not be treated as part of the surviving spouse's assets for means-testing purposes when assessing entitlement to local authority care funding. The theory: if assets are in a trust where the survivor is only a discretionary beneficiary (not an outright owner), the LA cannot automatically include the trust fund in the means test. IMPORTANT CAVEAT: (a) local authorities can challenge NRB trusts as a deliberate deprivation of assets if the trust was created at a time when care need was reasonably foreseeable; (b) if the surviving spouse receives regular trust payments, the LA may treat these as income and assess the trust; (c) legal advice is essential — NRB trusts for care fee planning are contested and carry significant risks; (3) PROTECTING ASSETS FROM FUTURE SPOUSE'S REMARRIAGE: if the surviving spouse remarries, any assets they inherited outright can pass to the new spouse on their death. Assets in an NRB trust remain protected — managed by the original trustees for the benefit of the testator's own children; (4) PROTECTING ASSETS FROM CREDITORS: a discretionary trust can offer limited protection against a surviving spouse's creditors or insolvency. Assets in the trust are not the survivor's legal property — they belong to the trustees. However, this protection is limited: a creditor can apply to set aside the trust if it appears to be a fraud on creditors.

The residence nil-rate band (RNRB) is the most important IHT planning consideration that interacts negatively with NRB trusts containing the family home: (1) THE RNRB BASIC RULE (IHTA s.8H): the RNRB (£175,000 per person, £350,000 for a couple in 2026) is only available where: (a) the estate includes a 'qualifying residential interest' (a home that the deceased lived in at some point); AND (b) the property (or the net sale proceeds if sold after 5 July 1986) is 'closely inherited' — meaning it passes to a direct descendant (child, stepchild, adopted child, grandchild, or their lineal descendants); (2) THE PITFALL — TRUST BENEFICIARY IS NOT A 'DIRECT DESCENDANT': if the family home passes into a discretionary NRB trust on the first death, the beneficiaries are the trustees — NOT a direct descendant of the deceased. A discretionary trust is NOT treated as a 'direct descendant' for RNRB purposes. THE RNRB IS LOST on the first death's share of the property; (3) THE NUMBERS: couple with a house worth £600,000 and total estate £900,000. NRB trust takes £325,000 from the house (as a share). Second death: survivor's estate is £575,000 (their share of house + other assets). Survivor's RNRB: only available on THEIR share of the property that passes to a child — £175,000 saved. The RNRB on the first death's £325k trust share is lost. Without NRB trust (TNRB instead): combined RNRB on survivor's death = £350,000 (both portions). Difference: £175,000 × 40% = £70,000 MORE IHT if NRB trust holds the house; (4) HOW TO AVOID: if the estate includes the family home and would benefit from RNRB, do NOT place the home in an NRB trust. Instead, direct the home directly to the survivor (full RNRB on second death) or directly to children (RNRB on first death). TNRB + TRNRB (£650,000 + £350,000 = £1,000,000 threshold) makes the NRB trust obsolete for most property-owning couples; (5) DOWNSIZING ADDITION (IHTA s.8FA): if the couple sells down, the RNRB downsizing addition may still apply to the survivor — but not to the trust share; (6) EXISTING NRB TRUSTS CONTAINING PROPERTY: if an existing NRB trust (activated before 2026) contains a share of the family home, consider whether a deed of appointment removing the property from the trust and transferring it to the survivor (as an advancement to a life interest) would recover the RNRB benefit. Tax advice is essential for this.

An activated NRB trust — where the first spouse has died and the trust is operational — has significant administrative obligations that many families are unaware of: (1) TRUST REGISTRATION (TRS): all NRB trusts (as UK express trusts) must be registered with HMRC's Trust Registration Service within 90 days of creation (i.e. the first death). The deadline for existing trusts pre-dating the TRS requirement (created before 2021) was 1 September 2022. Non-registration carries a fixed penalty of £100 and potential further penalties; (2) TRUSTEES' ANNUAL OBLIGATIONS: (a) the trustees must keep proper accounts of trust assets, income, and distributions; (b) if the trust has income (e.g. from rented property in the trust), a trust tax return (SA900) must be filed annually; (c) trustees must consider investment appropriateness and obtain advice if appropriate (TA 2000 s.4); (3) IHT PERIODIC CHARGE: a discretionary trust is subject to IHT 10-year periodic charges (IHTA ss.64-69) if the trust fund exceeds the NRB at the 10-year anniversary. For most NRB trusts created in the first death with a fund of £325,000 or less, the 10-year charge should be nil (the trust fund is within the NRB). But growth in trust assets over 10 years can create a chargeable event; (4) EXIT CHARGES (IHTA s.65): if the trustees distribute capital from the trust (e.g. to a child beneficiary), an exit charge may apply if the trust fund exceeds the NRB at the relevant time. Exit charges are proportionate fractions of the hypothetical 10-year charge; (5) WINDING UP THE TRUST: many NRB trusts should now be wound up — if the TNRB advantage makes the trust redundant for IHT and no care fee or family protection purpose exists. Distributing the trust assets to beneficiaries via a deed of appointment ends the trust. Tax advice is needed to ensure any capital gains tax (CGT hold-over relief — TCGA 1992 s.260) and stamp duty land tax (SDLT) issues are managed where property is involved; (6) CGT IN THE TRUST: NRB trust assets are liable to CGT on disposal at the trust rate (20% — or 24% for residential property after April 2024). Trustees can use hold-over relief on creation (TCGA s.260 — discretionary trust); and again on appointment out to beneficiaries if conditions met.